It is hard to wrap our heads around the unbelievable devastation left by Tropical Storm Harvey. Although many of the impacts of this storm are not yet quantified one that has historically been present during the Gulf of Mexico storms was eerily absent, soaring natural gas prices.
I wanted to contrast this storm with that of Hurricane Katrina, which affected New Orleans twelve years ago almost to the day of Harvey, to look for reasons why natural gas prices did not react the same way.
In 2005, 25% of all the U.S. natural gas production came from the Gulf of Mexico. This gas was transported to the market regions of the Mid Atlantic and Northeast and injected into storage for use during the upcoming winter. When Katrina made landfall, storage levels were 4% above the 5-year average so luckily any short-term production disruption should have minimal impact, right? Wrong.
During Katrina, 83% of the Gulf of Mexico production – 10 billion cubic feet per day – was shut down as drilling platforms were evacuated and damaged. This sent NYMEX prompt month prices into a scarcity frenzy reaching nearly $14 from $8 per MMBtu. Prices did not recover until after that winter because Hurricane Rita was soon to follow and an increase in new demand from power generation strained the slowly recovering supply.
Now let’s refocus on Tropical Storm Harvey. Storage levels were similar as we are sitting at 1% above the 5-year average. The same exact percentage of the Gulf of Mexico production was shut down at 25%; however, the big fundamental change is that this percentage now represents less than 1 billion cubic feet per day of production vs. 10 billion cubic feet in 2005.
Currently, the Gulf of Mexico is producing less than 5% of the natural gas in the U.S. The majority of the production is now coming from the shale regions in Ohio, West Virginia and Pennsylvania which have little to no operational disruptions due to storms in the Gulf of Mexico. When Harvey made landfall, NYMEX prompt month prices actually decreased from $2.95 to $2.89 per MMBtu as demand reductions from power outages and flooding in Houston outpaced the production declines in the Gulf.
The impact on natural gas pricing from these two devastating storms, Katrina and Harvey, are in stark contrast to each other due to the production shift away from the Gulf of Mexico to the OH-PA-WV shale regions. As we already know, this shale production has reduced natural gas prices to historically low levels and as clearly illustrated with this example, is helping insulate against price spikes caused by storms in the Gulf.
Our thoughts are with all those recovering from Tropical Storm Harvey, those in the path of Hurricane Irma and those suffering wildfires in the western states.